Big Row over Ponzi Scheme: Who’s Guilty? Final Part

On Monday May 10^th, 2021, we carried a well-researched story on Ponzi Schemes, as our lead story. The story was meant to let readers understand the import and origin of Ponzi Schemes; and juxtapose it with the President’s claim on various public platforms that many of the country’s financial institutions, affected by the financial sector reforms, were operating a “glorified Ponzi Scheme”.

The most recent of the President’s assertion is captured in part of his State of the Nation Address (SONA) to Parliament in January this year thus: “The Bank of Ghana and other supervisory agencies were unfortunately not performing their duties and the governance and management structures of many of the banks were clearly not adequate. If truth be told, many of our financial houses were running what can only be called glorified Ponzi Schemes and a delay of many depositors into these schemes.”

In the view of the President therefore, “…We were in a desperate situation and urgent radical measures had to be taken to prevent the collapse of the banking sector” and indicated government’s proactive measures to avert the situation before it collapsed the economy.

It’s our hope that after reading the final part of the article today, readers will make an informed assessment of the President’s take on Ponzi Scheme; and the facts, as our research findings show what really Ponzi Schemes are.

Please read on. 

As we have gone on carrying out our research on behalf of our readers, we have kept on bringing out the names of Microfinance Companies, licensed by the Bank of Ghana; Savings and Loans Companies, licensed by the same institutions; and Universal Banks and then looked at the companies ostensibly licensed and regulated by the Securities and Exchange Commission with licenses renewed every year and have been wondering how, if they fit the description of Ponzi Schemes as the President claims.

So The Today newspaper kept digging to gain further understanding of the words of the President of the Republic. There are companies—very well-known ones in the world, that run schemes with pyramid structures including the likes of Amway, Rodan + Fields, and Tupperware.

Among the more high-profile multilevel marketing companies that look like a pyramid scheme is Herbalife Ltd. Herbalife distributors can make money just by selling the company’s products, but they must purchase and sell thousands of dollars’ worth of the products before they realize a profit. Critics allege that the company’s top recruiters receive the vast majority of profits.

But, regulators have determined that a multilevel marketing structure is not fraudulent if the company makes most of its profits from selling products or services to end-user consumers, as opposed to recruiting new sales agents and requiring those agents to purchase their own inventory.

Examples of Ponzi Schemes.

The most famous Ponzi Scheme in recent history—and the single largest fraud of investors in the United States—was orchestrated for more than a decade by one Bernard Madoff of the USA.

He was accused and subsequently convicted of defrauding investors in Bernard L. Madoff Investment Securities LLC. He built a large network of investors that he raised cash from, pooling his almost 5,000 clients’ money into an account he withdrew from.

He never actually invested the money, and once the financial crisis of 2008 took hold, he could no longer sustain the fraud. The USA Securities and Exchange Commission values the total loss to investors to be around $65 billion.

Mr. Madoff was subsequently charged with not investing clients’ monies. Therefore, the paper has been asking, if the collapsed Ghanaian Banks, Savings and Loans, Microfinance Companies and Fund Managers never invested clients’ funds?  Or whether the funds were invested in enterprises or activities that failed?  Or they were bad managers of customers’/clients’ monies?

Again, in the USA, one Sarah Howe, opened a Savings Bank called Ladies’ Deposit Company (LDC) in 1878, meant to target unmarried women. She claimed that the bank worked in conjunction with a Quaker Charity that wanted to help less privileged women.

She promised high interest rates of eight percent per month. There was in fact, no such Charity. Howe was able to gain over 1,200 clients and US$500,000 in deposits.  A newspaper uncovered LDC as a fraud in 1880.

Howe was arrested, convicted, and served three years in prison. She reportedly didn’t learn her lesson in prison, as she attempted some other schemes after her release in the 1880s. There were attempts to re-arrest her; but fled to avoid it and eventually became a fortune teller until her death in 1892.

Several other examples abound and we have outlined just three of them so that our readers can compare them with the companies affected by this administration’s financial sector reforms programme:

1. On February 9, 2009, the City of London Police Economic Crime Department arrested Terry Freeman, director of GFX Capital Markets Ltd, over a £40 million fraud which is possibly a Ponzi Scheme.
2. On February 17, 2009, the Stanford International Bank and proprietor Allan Stanford were accused of “massive fraud” by U.S. authorities, and SIB’s assets were frozen. The apparent Ponzi Scheme drew in more than $8 billion of “deposits” to Sir Allen’s Bank in Antigua, many from investors in Latin America. He was sentenced to 110 years’ imprisonment on June 14, 2012.
3. In Haiti, in 2001, a Ponzi Scheme offered rates up to 15%. The outfits, called “cooperatives”, appeared to be implicitly backed by the government and became wildly popular in the population at large, who felt safe since the co-ops were openly advertising in radio and TV ads using Haitian pop stars as spokespeople. It is estimated that more than $240 million was swindled from investors, equivalent to 60% of the country’s government budget.

In Ghana, regulators seem to classify unregulated financial products most of whom operate for years, but only come to the public’s attention when they fail as Pyramid or lately, Ponzi schemes.  Over the past two decades, there have been several examples.

The most dramatic cases have been Pyramid and R 5 Schemes in 1995, which authorities such as Bank of Ghana, The Ghana Police CID and BNI faced difficulties in dealing with.

This seems to suggest that institutions and financial regulators lack the ability to recognize them at the early stage. The growth of schemes such as CB Net Marketing Concept in 2013, E Finance and More, Diamond Investment Ltd, Global Coin Community, Fine Fort, TCL Savannah Investment Ltd., seem to fit that description.

It is fair to state that the two non-bank financial institutions, Pyram and R5 started operating a Loans and Savings Scheme without license from the Central Bank. The institutions succeeded getting many members of the public and top government officials to deposit Billions of Cedis with them in return for very high interest rates.

The fact of the matter is that such schemes about in the country and still exist.

But in the course of our research, we have kept telling ourselves that the financial sector reform involved regulated and known financial institutions, and not those unknown to the authorities.

The financial sector the world over, thrives on the back of public confidence and the safety of regulator surveillance and assurance.  So when in one whirlwind of orchestrated actions, Ghanaian institutions are collapsed, even when some claim that the regulators are aware that government institutions owe them, and they are repeatedly given bad names, the whole system, at least the indigenous part, suffers.

As usual, some Ghanaians demand bloodletting forgetting to learn lessons from our recent history of coup making, executions and practiced judgments that led to confiscations of assets with some sold to foreigners.

As it is, the Ghanaian banking sector is now largely foreign owned or state owned. Name calling, meant to shame and justify harsh actions meant to punish and not to correct or reform institutions have made citizens keep asking what is meant by the characterization of some institutions as “Ponzi Schemes”.

Source: Richmond Keelson || Today